[divbyzer0]

A too-big-too-fail bank is using cheap short-term funding (from repos) to invest in long term assets, bonds.

The magnitude is concerning.

When confidence in overnight lending between banks reduces (because the other banks realise what this funding is for), the interest rate (measure of risk) rises.

For repo rates: 2.5% is high, 10% brings the house down, and has a blast radius that impacts the entire system.

[joobus]

No, that is not what is happening. The too-big-to-fail banks were lending to the repo market, and hedge funds were taking the cash to buy more assets. Then the tbtf banks decided to buy treasuries instead of lending in the repo market and the hedge funds were SOL. It's the hedge funds that were the problem. When your fund relies on overnight funding for its existence, you won't last long.

From the article:

This [repo] market, which relies heavily on just four big U.S. banks for funding, was upended in part because those firms now hold more of their liquid assets in Treasuries relative to what they park at the Federal Reserve, officials at the Basel-based institution concluded in a report released Sunday. That meant “their ability to supply funding at short notice in repo markets was diminished.”

[CriticalCathed]

I don't understand why we put up with these parasites on the economy. It seems too often we find out that well heeled bad actors in finance end up causing damage to the people who actually create wealth and prosperity in this country: the ordinary laborer.

[tenebrisalietum]

Because everyone likes and uses credit. Including the ordinary laborer that takes on a car note so he/she can get to his/her worksite.

[PeterisP]

I don't really see what's the crash mechanism there.

From the lender side, repo financing is collateralized so if someone can't pay, then the lender doesn't care because they've got the collateral bonds already; it's not ideal, but it's not a disaster.

From the borrower side, if someone really needs short-term liquidity and would have usually used repos but can't get any right now, then they do have available bonds that they've used as collateral for that repo, so if they really need cash then they can sell the same bonds instead of borrowing against them. Again, that's not ideal and they'll probably lose some money on an urgent sale, and their plans to earn some profit on that borrowed money won't materialize, but that shouldn't trigger a crash that would affect the whole system.